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Analysing the forward premium anomaly using a Logistic Smooth Transition Regression model

  • Sofiane Amri

    ()

    (CEDERS)

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    Several researchers have suggested that exchange rates may be characterized by nonlinear behaviour. This paper examines these nonlinearities and asymetries and estimates a Logistic Transition Regression (LSTR) of Fama Regression with the Risk Adjusted Forward Premia as transition variable. Results confirm the existence of nonlinear dynamics in the relationship between spot exchange rate differential and the forward premium for all the currencies of the sample and for all maturities (three and six-month maturities). Results confirm the insight into the presence of speculation barriers and transaction costs in the foreign exchange rate market that would explain, at least partially, the forward premium anomaly.

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    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 6 (2008)
    Issue (Month): 26 ()
    Pages: 1-18

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    Handle: RePEc:ebl:ecbull:eb-08f30042
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    5. Richard H. Clarida & Lucio Sarno & Mark P. Taylor & Giorgio Valente, 2006. "The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1193-1224, May.
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    8. Charles Engel, 1995. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
    9. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," SSE/EFI Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
    10. Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002. "Smooth Transition Autoregressive Models — A Survey Of Recent Developments," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 1-47.
    11. Bilson, John F O, 1981. "The "Speculative Efficiency" Hypothesis," The Journal of Business, University of Chicago Press, vol. 54(3), pages 435-51, July.
    12. Baillie, Richard T. & Kilic, Rehim, 2006. "Do asymmetric and nonlinear adjustments explain the forward premium anomaly?," Journal of International Money and Finance, Elsevier, vol. 25(1), pages 22-47, February.
    13. Kaminsky, Graciela, 1993. "Is There a Peso Problem? Evidence from the Dollar/Pound Exchange Rate, 1976-1987," American Economic Review, American Economic Association, vol. 83(3), pages 450-72, June.
    14. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    15. Terasvirta, T & Anderson, H M, 1992. "Characterizing Nonlinearities in Business Cycles Using Smooth Transition Autoregressive Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S119-36, Suppl. De.
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